“How to work with creative people: Find people with bold beliefs, get the hell out of their way, and let them do their thing.” –David Perell
The promise and perils of biotech – Silicon Valley Examined 32
In this episode of Silicon Valley Examined, Don Watkins and Yaron Brook discuss the exciting potential of CRISPR and other biotech breakthroughs, as well as how to think about the potential risks of these revolutionary technologies.
Critical Mass is Critical
Robert Hendershott and Don Watkins
Telling people to take advantage of network effects is a little bit like telling them to win the lottery. “Hey, go find a ton of users, and then your product will be super-valuable!”
But while you can’t guarantee a network business model will be successful, it’s not a lottery. Above all, you can adopt strategies designed to help your business reach critical mass.
Critical mass is the point where the network effect kicks in: below this critical level, few people are interested in the product (remember, a network product is only valuable when enough people are using it); above, demand explodes. This leads to rapid growth.
Think of any communication technology. If nobody was using email, nobody would want to use email. If there were no buyers on eBay, nobody would be trying to sell on eBay. But if you manage to bring in enough sellers, buyers start to appear, attracting more sellers, who attract more buyers, and the virtuous cycle becomes self-sustaining. This is critical mass in a network business model.
Recall phones. Owning the first phone has no value (phone, not smartphone that does a hundred useful things). Who are you going to call? Yourself? Good luck, the line is always busy. But a phone’s value grows with adoption/usage: as other people get phones you can talk to them! More phones in use makes each of those phones more valuable. Eventually you can’t live without your phone.
The adoption level at which phones (or any other network product) start being clearly desirable to customers defines critical mass. That might sound like an unhelpful truism, but actually it’s the key fact that shapes the early strategy of a network business model: namely, get to critical mass as quickly as possible, by any means possible.
To get to critical mass may require subsidizing early adopters (who initially get little value from their phone because so few are being used) with an eye on the long-term profits available from the increasing returns available past critical mass. Early on, PayPal literally paid people to sign up for the service.
It may require enticing the more reluctant side of a platform: there are more people interested in renting a Maui beach house for a week than there are people willing to rent their Maui beach house. AirBNB needs both—and if they get the beach house listings, the beach lovers will come (attracting more beach houses, attracting more beach lovers, etc.).
Whatever it takes, getting to critical mass is crucial for a network business model to succeed because it is a prerequisite for the network to provide users value.
A new network effect business model can achieve critical mass by piggybacking on existing networks. Cellphone adoption was much faster than landline adoption because the first cellphone had immediate value: you could call landlines! Cellphones followed a different path to explosive growth, the stealth business model.
Critical mass can come in stages, each levering a smaller network. It would be very hard to get Facebook to critical mass if users joined randomly from all over the world. It would take thousands, maybe even millions, of users before you started to get significant value from being connected to the (random) group. But it is relatively easy for students in a dorm at Harvard to get value from using Facebook—each is interested in connecting with the rest. This makes it relatively easy to get students at Harvard generally to join Facebook, which makes it relatively easy to get students at Ivy League schools on Facebook, which makes it relatively easy to get college students, which makes it relatively easy to get siblings and parents, which leads to three billion people using Facebook.
Generally, network business models are good candidates for also being viral business models, and viral spread is a very effective way to reach critical mass. Most of the highest-value companies in the world, both to users and in the stock market, have combined network and viral business models.
Critical mass is a crucial milestone in a Network Business Model. This is the point where the network starts having serious value to users and the virtuous cycle of “more users creating more value attracting more users” kicks in.
And our connected world makes getting there easier than ever.
The slow, senseless, strangulation of nuclear
This is the saddest chart I’ve seen in a long time.
Nuclear power has incredible promise, and yet instead of building more nuclear facilities, we’re shutting down existing ones. That’s all the more depressing when you look into why progress has been faltering. As Alec Stapp notes (quoting Bloomberg):
This is an infuriating Catch-22: “To prove the safety of designs, for instance, the commission demands data from similar plants, but none of the smaller installations have been built in the U.S., so there’s no performance history.”
For anyone who values progress, this is shameful.
Curiosity cured the cat
Over at Future, Justin Gage makes the case that we’ve bought into this idea: either you know how to code or you’re tech illiterate. But the truth is that tech literacy exists on a spectrum, and in a world that’s increasingly reliant on software, you want to understand the tools you’re using—even if you don’t understand them at the deepest level.
You can think of it just like playing an instrument. There’s a big difference between being able to strum a few chords on guitar and being able to rip out a gnarly solo. Both are great, and utility purely depends on what you’re trying to accomplish. Technical literacy is no different. You don’t have to learn how to code to benefit from knowing what code is and how it gets written.
Being technically literate simply means that you’re comfortable with the basics of how technology works, and critically, you understand the area you work in with more depth.
Justin is touching on an issue with much more far-reaching consequences than whether a salesman at a software company can effectively pitch his product. The deeper question is: what happens when people don’t understand, at some level, the technology they depend on?
That’s the question asked by Daniel Golliher in an essay that explores the problems faced by New York City and the barriers to solving those problems.
New York City has a lot of curious problems. Despite being America’s preeminent city, possibly the world’s, it continues to lose the ability to course correct and do fundamental things. For example: it uses sidewalks as garbage bins, it can’t build subway lines (and hasn’t in about 80 years), and it can’t build housing.
Not only don’t those problems get solved, smart people are “incurious about them.”
This overbearing incuriosity in the face of crumbling capacities resembles a civilization that has lost the ability to understand and build its own advanced technology.
The inertia of the past allows them to keep using their tech as long as it lasts, but when it breaks it just disappears, unable to be fixed. People steadily adjust to their monotonically decreasing baseline of well-being as their technology fades, returning them to more expensive and labor-intensive modes of existence. After a generation, no one would lament the state of things, because they’d have no experience of a better way of life.
One of my hopes for the progress movement is that this is precisely what it will correct. Not everyone who studies progress will “learn to code,” i.e., to invent new technologies. But everyone can learn to understand the basic conditions that allow progress to take place—and be deeply curious (and frustrated) when they see problems that aren’t getting solved.
Breaking Silicon Valley’s tech monopoly
No, I don’t mean efforts to break up Facebook. I’m talking about the migration of tech companies like Tesla, Oracle, and HP away from Silicon Valley to places like Austin, Texas.
“I believe this is just the tip of the iceberg,” said Dan Ives, who has been covering the tech sector for more than two decades, and is currently managing director at Los Angeles-based Wedbush Securities. He said 20% of the companies he follows are considering relocating or opening a second headquarters outside of California.
Stanford’s Hoover Institution tallied 74 such company moves out of the state in the first half of last year, more than all of 2020 and higher than the comparable period in each of the prior two years. Researchers cited a litany of factors for the change: the rising cost of living in California, a tax structure and labor policies that many corporate leaders see as unfriendly, and concerns that the quality of life is declining.
The danger is not that Silicon Valley’s competitive advantages will disappear overnight. But unlike efforts to start new “Silicon Valleys” from scratch, Austin has organically attracted a burgeoning supply of talent and capital. Paired with advantages like a more attractive cost of living, and a less burdensome regulatory environment, the movement of talent out of the Valley could accelerate.
A new study on the American Economic Review finds that removing the incentive for academics to innovate reduces innovation.
National policies take varied approaches to encouraging university-based innovation. This paper studies a natural experiment: the end of the “professor’s privilege" in Norway, where university researchers previously enjoyed full rights to their innovations. Upon the reform, Norway moved toward the typical US model, where the university holds majority rights. Using comprehensive data on Norwegian workers, firms, and patents, we find a 50 percent decline in both entrepreneurship and patenting rates by university researchers after the reform. Quality measures for university start-ups and patents also decline.
This finding isn’t surprising. But on the bright side, it points to a good opportunity: US universities could do a lot for progress by adopting “professor’s privilege.”
Until next time,
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Hi Don and Robert.
As I read the section about tech leaving Silicon Valley, I thought you were setting up for an obvious reference back the Curiosity section. Something like "Silicon Valley is using it's tech - in this case tech company saturation - as long as it lasts, but as it disappears, the powers that be are unable to fix it. They have lost the knowledge of what brough the tech companies there in the first place."
Perhaps I am overreaching the connection?